Va. Payday Lenders Assailed, Defended

RICHMOND — Legislators hold a hearing to discuss how to deal with the industry, which has come under fire.

Battle lines formed Tuesday for a 2007 legislative showdown over the controversial practice of payday lending, which some lawmakers want to ban in Virginia.

The outcome has particular significance for Hampton Roads, where payday-lending storefronts have mushroomed since passage of legislation in 2002.

Industry representatives say the popularity proves that the business fills a real need, providing short-term cash for emergencies. Formal complaints are rare, they say, and they're willing to work with the legislature on measures that fall short of a ban.

Critics say these lenders prey on the poor and vulnerable by offering quick money at sky-high interest rates, exploiting people who can't manage their own finances and trapping them in a vicious spiral of debt.

During a three-hour hearing before the House Commerce and Labor Committee, Del. Johnny Joannou said more people in his city of Portsmouth are becoming addicted to a deceptive shortcut. He took no comfort in its growing popularity.

"There are a lot of people out there on dope," he grumbled, "and they have to have it every day."

A vice president with Advance America, who was representing a trade association, said critics aren't giving the public enough credit. And the industry has no interest in luring people who cannot afford to pay up.

"These folks understand the terms of these loans," said Carol Stewart. "It is absolutely a convenience business. They want the cash now. They need the cash now."

The committee heard from consumer advocates, religious leaders, economists and industry representatives. Members did not vote, but they discussed a couple of different approaches that will be debated in January when the General Assembly returns.

Del. John O'Bannon, R-Henrico, would repeal the 2002 legislation that led to the expansion of payday lending in Virginia. That would effectively ban the storefront businesses because they would be forced to cap interest rates at a level too low for the practice to survive.

An alternative approach will come from Del. Glenn Oder, R-Newport News. His bill would create a real-time database to track people who get multiple loans from different lenders, then set limits on the number of loans and/or the amount that is loaned.

It would also provide a "cooling off" period between loans.

Oder said he regretted not anticipating how payday lending would take off following passage of the legislation.

"I feel like I was asleep at the wheel," he said, "and I left the gate unlocked."

There is no doubt that the business is popular.

According to state figures, more than 445,000 people took out more than 3.3 million payday loans in 2005. The dollar amount nearly topped $1.2 billion.

The average customer takes out about seven loans a year, according to one estimate.

But according to state figures cited by the industry, formal complaints are relatively rare: 56 in 2005 and 33 so far this year.

The General Assembly passed a law regulating payday lenders because they'd moved into Virginia while contracting with out-of-state banks. That allowed them to charge higher interest rates than Virginia law normally allows for small lenders.

Even lawmakers who didn't support payday lending voted for the bill, because it seemed the practice was here to stay, like it or not.

Since then, the federal government has clamped down on partnering with out-of-state banks, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

"You can enact Delegate O'Bannon's bill and you can make it stick," she told the committee.

But industry representatives said banning the storefronts would force people to get payday loans via the Internet, and that's even less secure.

Stewart said she would be willing to discuss giving people the option of a no-interest repayment plan if they have trouble paying off the loan.

But some committee members remained skeptical. Del. Harvey Morgan, R-Middlesex, chaired the hearing and sponsored the 2002 legislation.

He was reluctant to do so at the time. After the hearing, he said he wished he had that vote back, now that the federal government has acted.

"I feel," he said, "like I created a monster." *

200

Estimated minimum number of payday lending businesses in Hampton Roads.